Verizon iPhone Burden, Pension Costs, Lead to $2 Billion Loss

Verizon posted its highest-ever quarterly revenue growth during the fourth quarter of 2011, but the cost of supporting the iPhone, plus "pension items," drove it into the red.

Verizon Wireless enjoyed strong device sales and FiOs broadband growth that helped it pull in $28.4 billion in revenue in the fourth quarter, but it wasn't enough to offset iPhone and pension costs that drove the carrier to $2.02 billion in losses.

Verizon's quarterly 7.7 percent revenue growth was the highest in its history, and the 1.5 million wireless customers that came on board were its largest increase in three years. It also sold 4.2 million iPhones during the quarter-more than double the 2 million it activated during the third quarter. But while sales of iPhones are what Verizon is shooting for-especially with AT&T and Sprint also offering the iconic device-the high price that Apple charges for each iPhone puts carriers in the position of paying a higher subsidy for it than any other device, which in Verizon's case helped drive profits for the quarter into the red.

Sprint, similarly, has defended its decision to take on the iPhone, which has brought down an avalanche of costs, sending Sprint looking for a loan but insisting that the investment will be well worth it in the long run.

Verizon, in total, sold 7.7 million smartphones during the quarter. This was 1.5 million units shy of BTIG analyst Walk Piecyk's forecast. Piecyk told Bloomberg that this suggested "waning demand" for Android-running handsets, and was "a little surprising," given holiday shopping and Verizon's intense marketing around 4G.

"Verizon Wireless produced particularly strong growth in the fourth quarter. While that diluted wireless margins in the short term, it is good news for revenue and margin growth over the long term, particularly given our leadership in the rapidly developing 4G LTE ecosystem," Verizon CEO Lowell McAdam said in a statement, and insisted on during a Jan. 24 call with analysts and journalists.

"Wireline margins recovered from third-quarter pressures, and we expect wireline margin expansion in 2012," McAdam continued. "With recent strategic moves and our investments in FiOS, LTE, and global IP and cloud-based strategic services, Verizon has set the stage for accelerated growth across our business units, and we look to continue to build significant value for shareholders in 2012."

CFO Fran Shammo called Verizon "without a doubt a market leader in pioneering the growth of LTE," and the company has moved up the timeframe in which it expects to have its 3G footprint covered in Long-Term Evolution (LTE) to mid-2013.

With the long-desired Apple iPhone now on board, and LTE-equipped Android smartphones constituting an "extremely significant" portion of its portfolio, according to Shammo, the LTE rollout will help Verizon to more efficiently support the demands of its consumer customers, as well as those enterprise customers it's aggressively courting to help bolster operations.

Last month it created Verizon Enterprise Solutions, a sales and marketing organization designed to solutions for business and government customers worldwide. Verizon's global enterprise agendas were also furthered by its $1.4 billion acquisition of Terremark in January 2011, and its increasing focus on cloud-based services.

Noting the potential for Verizon's LTE market leadership position, Shammo said that investors shouldn't "lose sight of the machine-machine market," which will soon show considerable growth in the automotive industry, among others.

In September, Terremark opened the Network Access Point (NAP) of Amsterdam, a new top-tier data center that will serve "as the foundation for the secure, enterprise-class services the company offers to customers throughout the world," Verizon said in a Sept. 22 statement.

Earlier that month, Terremark also completed an expansion of a data center in Sao Paulo, Brazil, providing enterprise customers with a hosting environment for applications and giving Verizon its first real foothold in Latin America, "a high-growth area for us," Shammo said.

During the call, Shammo continued to point to Verizon's "proven track record in wireless," and the company's ability to "drive profitability and growth."

Verizon offers some of the highest-priced smartphones in the industry, as well as some pricey plans. In partial acknowledgement, Shammo noted: "We are a premium-priced product, but we will win in the marketplace. ... There are people who just want to be on the best network in the world."

Michelle Maisto has been covering the enterprise mobility space for a decade, beginning with Knowledge Management, Field Force Automation and eCRM, and most recently as the editor-in-chief of Mobile Enterprise magazine. She earned an MFA in nonfiction writing from Columbia University, and in her spare time obsesses about food. Her first book, The Gastronomy of Marriage, if forthcoming from Random House in September 2009.